Experts warn that freelancers deemed ‘employees’ may bring action after a landmark settlement between HMRC and one of their former freelancers.

Caroline Wood, Director at HR Heroes says “this could open the floodgates for legal action from freelancers who have been classified as employees, which may include backdated claims…the cost of this could be huge”.

Susan Winchester, a marketing and business development consultant, initiated a claim at an Employment Tribunal in London for over £4000 in unpaid holidays against HMRC and four other businesses. Her argument was that it is unfair to be classified as an ‘employee’ for tax purposes if on the other hand, you weren’t being provided with the rights of an employee in return.

In April 2000, IR35 regulations were introduced which was designed to tax ‘disguised employment’. Under these regulations, freelancers who work through a (PSC) personal services company for a third-party business and who would otherwise be classified as ‘employees’ if it were not due to the set-up arrangement of the PSC, are required by law to pay income tax and NI, the same as if they were employees.

When IR35 was first introduced, it was the responsibility of the contractor to determine whether or not they were in scope of IR35. This was changed in April 2017 which then made public sector organisations responsible for determining the tax status of their freelancers, with the government currently considering extending this to the private sector.

HMRC hired Susan Winchester’s PSC, SJW Marketing Solutions n 2016. Wen the IR35 rules were updated in April 2017, HMRC determined, using it’s ‘Check Employment Status for Tax’ tool, that IR35 should apply to Winchester, which then necessitated her move onto agency payroll.

Winchester argued that if she were now classified as an agency worker, then she is entitled to employee rights, such as holidays, as if she were an employee of HMRC.

The case was settled on the day the employment tribunal was due to start.